The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)
With permission. Mr. Speaker, I should like to make an announcement about the control of borrowing.
I want to repeat something which I said in this Chamber a fortnight ago in Committee on the Finance Bill. That is that the Government's economic objectives are fundamental and unchanging—to put the strength of sterling, the soundness of our international position, and price stability first.
I said, at the same time, that we would keep the policies by which we intend to reach these objectives flexible; and that we must, in particular, make sure that we go ahead as fast as conditions allow in those activities which concern our export trade and in industrial investment.
That was in relation to initial allowances. I consider that the time has come when, with the same objectives and without modifying these basic aims of policy, we can also safely make some limited relaxations in the control of borrowing.
As regards bank credit, I have decided that I need not ask the banks to restrict the total level of their advances to any given figure after the end of July. For the future I hope to dispense with official requests to restrict total advances and to retain control over bank credit by normal monetary measures reinforced by a new arrangement under which the Bank of England will, if need be, restrict the liquidity of the banking system by calling for special deposits.
This will be a temporary arrangement pending the recommendations of the Radcliffe Committee, to whom we look for advice about any permanent changes. But it will be available if, in the meantime, existing monetary instruments are not sufficient to secure the necessary control over the credit system. These arrangements are recorded in more detail in correspondence between the Governor of the Bank of England and myself, which I will circulate in the OFFICIAL REPORT.
In the second place, I have decided to make adjustments in the scope of the Capital Issues control. They are set 1594 out in detail in a letter to the Chairman of the Capital Issues Committee, which will also be circulated in the OFFICIAL REPORT. At the same time, the Treasury has made an Order, published today and operating tomorrow, amending the Control of Borrowing Order.
Briefly summarised, the new provisions are these:
I need only add that we are determined not to return to inflationary conditions. But it is clearly right to encourage such sound development as we judge to be within our capacity. That is the main purpose of these measures.
- (1) The Committee may take a longer view in examining proposals which come before them; thus, instead of limiting their consents to proposals which are currently urgent, they may assent to applications which anticipate future needs.
- (2) In view of the new arrangements which I have just described for securing the necessary control of bank credit, the Capital Issues Committee will no longer be concerned with the appropriateness of bank finance for capital purposes.
- (3) The exemption limit will be restored from the present level of £10,000 to the former level of £50,000.
- (4) Bonus issues or capitalisation of reserves will no longer come before the Capital Issues Committee. But where the issue of redeemable securities is involved, the consent of the Treasury will be needed.
- (5) The amending Order contains provisions to prevent the raising of new money outside the Control.
Mr. H. Wilson
We are glad that the Government are very, very slowly responding to our pressure for recognition—[Laughter.]—it is on the record and hon. Members can look it up in the Budget debates—that the problem that the country is facing is not inflation, as the right hon. Gentleman maintained, but recession. Would the right hon. Gentleman say why, in ending the three-year-old credit squeeze on advances, he has not first, to stimulate industrial investment, rescinded the two other more recent restrictive measures? The first is the emergency cuts in the nationalised industries' investment programme announced 1595 last September. The second is the abolition of the investment allowance, which the Chancellor, only yesterday, said we still could not afford to restore.
While we welcome the proposal to introduce this new system of special deposits which the Chancellor will find we pressed on one of his predecessors on 9Lh May, 1956—and we welcome the fact that the Government have done this after all this time—is the right hon. Gentleman not aware that at present industry is operating so much below capacity that this removal of the credit squeeze is largely a meaningless gesture and that he ought to be restoring the cuts in the investment programmes of the nationalised industries and giving a positive incentive to sound private investment?
§ Mr. Pickthorn
On a point of order, Sir. Will it be in order for back benchers also to indicate their view of recent history, or to indicate the alternative policies which ought now to be pursued by the right hon. Gentleman?
§ Mr. Speaker
I shall have to hear what the supposititious back bencher desires to say before I can rule whether it is in order or not.
In reply to the right hon. Gentleman. I would put the matter rather differently. The fact that these relaxations can now safely be made is a tribute to the success of the Government's economic policy.
The right hon. Gentleman asked me about the sector of public capital expenditure. Of course, my statement today does not deal with that. I have been dealing with the sphere of private investment. There is nothing in these proposals which deals with public expenditure. [HON. MEMBERS: "Why not?"] I have made it clear before, if hon. Gentlemen will listen, that we are keeping that matter, as others, under continuous consideration, and if and when the time comes for any adjustments of the limit which we have at present set, then those adjustments will be made.
We discussed the right hon. Gentleman's second question, about investment allowances, fairly fully last night. I explained to the Committee then that in this year's Finance Bill the alternative of increasing the initial allowances had 1596 been decided on, and I have nothing to add to what I said.
§ Sir R. Jennings
Would the Chancellor accept the view that his proposals will be acclaimed with a great deal of admiration by industrialists and other people throughout the country in spite of the "dismal Desmonds" on the other side of the House?
Mr. H. Wilson
Has not the right hon. Gentleman's answer been a startling, rapid confirmation of our accusation last night that he is showing a bias in favour of expanding private as opposed to public investment? In view of the Chancellor's tribute to himself and his economic policy, is it not a dismal admission that the country is still too weak to afford the investment allowances that we had until 17th February, 1956, and also to afford a higher level of investment in the nationalised industries?
I am so sorry, but I was thinking of the last part of the right hon. Gentleman's question. Would he be so good as to give me a cue to the first part of his question?
§ Mr. Grimond
May I ask the Chancellor to give us a little more information about the special deposits? As one of the most notorious causes of inflation has been the Government's own short-term borrowings, how will the special deposits affect those, and why has the right hon. Gentleman rejected, even as a short-term measure, the suggestion that he should have Treasury deposit receipts?
I would repeat that the matters dealt with here do not affect directly either Government spending or Government borrowing. They deal with the sphere of private borrowing.
§ Lieut. - Colonel Bromley - Davenport
Would my right hon. Friend be very careful about how much further money he puts into the nationalised industries, because all classes in the country feel that in a great many cases this would be pouring good money after bad?
§ Mr. Collins
Can the Chancellor say whether he has given any consideration to the relaxation of hire-purchase restrictions? They were almost the first to be affected by the Government's policy 1597 of credit squeeze, and in some industries at least considerable unemployment has arisen from the restrictions. Will the right hon. Gentleman now relax them?
There is no relaxation here of the direct controls over hire purchase, but if the hon. Gentleman will look at my letter to the chairman of the Capital Issues Committee, he will see that there is something there that has an indirect relation to hire purchase.
§ Mr. Osborne
Mr. Speaker, on Question No. 3 this afternoon I raised this very point of hire purchase and the Financial Secretary asked me not to press him to reply because a statement was to be made at the end of Questions. May I, therefore, ask this question?
Since the relaxation of credit must inevitably lead to greater hire-purchase facilities being created, will the gentleman's agreement that has been imposed upon the Big Five banks by the Treasury now be relaxed, and so allow the Big Five banks to control hire-purchase business, to ensure that it is properly organised and that there are no excess charges?
§ Following is the correspondence:
§ Letter from the Chancellor of the Exchequer to the Governor of the Bank of England
§ 1st July, 1958.
§ MY DEAR GOVERNOR,
§ On 19th September last my predecessor stated that the situation required that the average level of bank advances during the coming 12 months should be held at the average level for the preceding 12 months. He informed the clearing bankers of this requirement, and they gave their assurance that, despite the difficulties, they would intensify the restriction of credit and do their best to achieve this result. Similar support was given by the British Bankers' Association and other banking associations and committees concerned.
§ In my Budget statement on 15th April I thanked the banks for the co-operation which they have shown in keeping down the level of advances fully in accordance with the undertakings which they gave to my predecessor; and I asked them to continue that policy.
§ After reviewing the development of the past few months, I have now concluded that the situation does not require that I should renew Mr. Thorneycroft's request in September and that some gradual relaxation between now and then is justified. I have, therefore, decided that I need not ask the banks to restrict the total 1598 level of bank advances to any given figure after the end of July.
§ At the same time, I trust that the banks, in framing their advances policy, will have regard to the revised guidance that I have given to the Capital Issues Committee in my letter of today (of which I enclose a copy) regarding the treatment of applications for which the consent of the Treasury is required. I should like to stress the importance which I attach in present circumstances to the provision of credit for export business, whether in the ordinary course of business or through medium-term financing under E.C.G.D. guarantee. I also wish to re-emphasise the hope which I expressed in my Budget statement that projects for sound development in areas where unemployment is substantially above the average should not be held back by lack of credit or finance.
§ As to the future, it would clearly be wise to await the recommendations of the Radcliffe Committee before considering any permanent changes in the methods of influencing the volume of bank lending. I regard it as essential, however, that in the interim period some provisional method should be at hand to reinforce the existing machinery of interest rates and open market operations if it should again prove necessary to restrain an increase of total bank advances. Both the Bank of England and the banking organisations have repeatedly impressed upon H.M. Government that the method of "official requests" made to the banks several times in recent years to restrict total advances, although it has proved efficacious for short periods, hampers the efficient working of the banking system and is thus damaging both to the banks and to the public interest if carried on for too long or too frequently renewed.
§ I accept this view and I should, therefore, be grateful if the Bank of England would, between now and the end of July, prepare an alternative scheme which could, if necessary, be introduced as a temporary measure pending the Radcliffe Committee's report.
§ I should be glad if you would inform the banking associations and committees concerned of the terms of this letter, and, at the same time, again convey to them the appreciation by H.M. Government of their ready and effective response to the requests made by my predecessors and myself in recent years.
§ Yours sincerely,
§ (sgd.) DERICK HEATIICOAT AMORY.
§ C. F. COBBOLD, Esq.
§ Letter from the Governor of the Bank of England to the Chancellor of the Exchequer
§ 3rd July, 1958
§ Dear Mr. Chancellor,
§ I have informed the banking associations and committees concerned of the terms of your letter of the 1st July.
§ You ask that an alternative scheme should be prepared for use to reinforce the existing machinery of interest rates and open market operations if it should again prove necessary to restrain an increase of total bank advances. The Bank of England have now drawn up the 1599 heads of a scheme for "special deposits" which could be available for introduction as a temporary measure pending any recommendations which may be made by the Radcliffe Committee.
§ I have already discussed this scheme in general terms with representatives of the principal banking organisation concerned, and details are now being settled.
§ The broad outline of the scheme is as follows:—
§ When it appeared necessary, in support of other monetary measures, to restrict the liquidity of the banking system and thus the ability of the banks to extend credit, the Bank of England would call for special deposits to be made with them by the banks. Such deposits would carry interest based on the current Treasury Bill rate. They would not qualify for inclusion in the banks' liquid assets. There would be provision for partial release by agreement with the Bank of England when justified by special considerations.
§ The banks would continue to maintain their usual minimum ratios between liquid assets and total deposits.
§ Calls would be made on each group of banks separately, the amount being related to the total gross deposits of each group at a specified date with monthly adjustments to take account of variations in the deposits of each bank. The ratio of a call to total deposits would not necessarily be the same for each group.
§ Initially, the scheme is being discussed with the Clearing and Scottish Banks, but it might later be more widely applied in the light of experience.
§ The scheme would serve to reinforce the existing monetary instruments and would be employed as a general control of credit in the same way and after the same sort of consideration as Bank Rate.
§ I understand that this scheme meets with your approval in principle.
§ I have conveyed to the banking organisations your renewed expression of the appreciation by H.M. Government of their co-operation.
§ Yours sincerely,
§ C. F. COBBOLD.
§ The Rt. Hon. DERICK HEATHCOAT AMORY, M.P.
§ Letter from the Chancellor of the Exchequer to the Chairman of the Capital Issues Committee
§ 1st July, 1958.
§ Dear Lord Kennet.
§ I. I have now completed my review of credit policy and the results as they affect the control of borrowing are set out in this letter for the guidance of yourself and your colleagues on the Capital Issues Committee. This letter is intended to supersede the memoranda and letters previously sent to the Committee.
§ 2. First, as to the purposes for which consent should be given or withheld. Hitherto, the basic guidance to the Committee has been the statement of principles in the letter written to you by Mr. Butler as Chancellor on 4th 1600 December, 1951. That guidance has since been modified from time to time by statements and requests which successive Chancellors have sent you on specific points reflecting developments in economic and financial policy. The practical effect of these successive statements and requests may be summarised as follows:
- (i) the Committee are asked to recommend consent only when they are satisfied that the purpose of an application has definite urgency under current requirements;
- (ii) in exercising their judgment on the merits of individual applications the Committee are asked—
- (a) to recommend in favour of investment designed to maintain or increase the production of goods or services for essential purposes, with particular regard to the production of exports, the saving of imports and the earning of foreign exchange; and
- (b) to recommend against investment for production or distribution or provision of services in the home market which in the judgment of the Committee can be postponed.
§ 3. I have decided that this statement of the principles governing the work of the Committee should stand with one modification as regards the criterion of urgency. I now consider that the Committee can justifiably take a longer view and regard as eligible for consent an application for a purpose which may not be immediately urgent but which anticipates the future growth of requirements, bearing in mind that a primary objective is to stimulate production of exports, saving of imports and earning of foreign exchange. For the time being I do not consider that the criterion of immediate urgency should be relaxed where one of those elements is not present.
§ 4. The Committee are asked to continue the practice of referring applications to the Government Departments concerned with the purposes for which the finance is required. The Committee will no doubt take full account of any advice, favourable or unfavourable, that may be offered by Departments. But I emphasise that the Committee are not bound by such advice and that I shall continue to rely on their personal judgment of the merits of each case that is referred to them.
§ 5. The Committee should also continue the practice—where they think it appropriate—of discriminating between the several parts of an application and where they think fit recommending consent to the raising of finance only for part of a project.
§ Special Objects
6. I do not suggest any general change in the list of special purposes which the Committee has hitherto been asked either to discourage or to encourage. But some modification of emphasis is required, and I think it will be useful to restate these items as follows:—
Speculation: Recommendations for consent for borrowing intended to finance the speculative buying or holding of shares, materials or real property (including the development of land) should continue to be withheld.
Investment Trusts: The Committee may feel free to recommend consent to applications from investment trusts and unit trusts, but when considering cases in which the finance is proposed to be applied in making significant purchases of foreign securities, the Committee are asked to bear in mind that the principal benefit which these trusts bring to the economy is that they encourage savings and supply risk-bearing capital for British industry.
Hire-purchase finance: Such applications should be critically scrutinised but the Treasury will be prepared to act on a recommendation in favour of an issue where the Committee considers that the raising of finance is desirable as a means of improving the stability of the hire-purchase financial system.
Commonwealth projects: The Committee are asked to continue to give sympathetic consideration to projects which appear to them to be likely to contribute materially to strengthening the sterling area's balance of payments with the non-sterling world.
Investment in areas of persistent unemployment in Great Britain or Northern Ireland: Consent may be recommended to any proposal for sound development which is likely to reduce unemployment in an area of Great Britain where there is a high rate of unemployment which would otherwise be likely to persist, or to any proposal for financing investment in Northern Ireland which though desirable might not qualify for consent if the investment were made elsewhere in the United Kingdom.
§ Bank advances for capital purposes
§ 7. The time has come for the banks to resume full responsibility for the terms of bank advances. Applications for bank finance for capital purposes, being outside the normal course of the applicant's business, require Treasury consent under the Control of Borrowing Order and, therefore, will continue to be referred to the Capital Issues Committee for their advice. The Committee in dealing with such cases should consider the purpose of the proposals on the same principles as they apply to proposals financed from non-bank sources, but they should leave the appropriateness of bank finance and the terms as to period and repayment of advances to the discretion of the banks themselves.
§ Control of Borrowing Order
§ 8. In addition to revising the policy guidance I have also revised the statutory framework within which the Committee operates, and the Control of Borrowing Order is being amended in the following respects.
§ 9. First, the exemption limit. Since March, 1956, it has been unlawful to raise more than £10,000 in Great Britain without the consent 1602 of the Treasury. I have now restored the exemption limit to £50,000.
§ 10. Secondly, the control over bonus issues or the capitalisation of reserves. The amending Order provides for the exemption from control of all capitalisation issues except for capitalisation of reserves involving the issue of redeemable securities. This limited class of issues will continue to require the consent of the Treasury, who will decide them without reference to the Capital Issues Committee since the purpose of retaining control over such issues is to prevent operations designed to reduce tax liabilities.
§ 11. Finally, the Order has been amended to prevent new money from being raised outside the control by artificial devices. The object of the Capital Issues Control is to regulate the raising of new money: and following this principle, in April, 1955, the Treasury amended the Order to exempt from control certain classes of capital operations which for the most part did not involve raising new money, in order to free normal commercial transactions from restrictions. Unfortunately, this relaxation has been abused and the exempt operations have been adapted to raise large sums of new money for undertakings which have been refused or would have been refused permission to borrow. As long as the control of borrowing is retained, it must be made effective, and I see no alterative but to restore statutory control over the classes of transactions that were exempted three years ago. I regret the inconvenience to legitimate business transactions. But I know I can rely on the Capital Issues Committee to recommend consent to such transactions with the minimum of enquiry and delay, and to concentrate their critical attention on the transactions that are really devices for raising new money.
§ 12. In conclusion, may I say to you and your colleagues how greatly I value your services and how glad I am that I can continue to rely upon your judgment and experience.
§ Yours sincerely,
§ (Sgd.) DERICK HEATHCOAT AMORY.
§ The Rt. Hon. LORD KENNET. P.C., G.B.E., D.S.O., D.S.C.